Sterling hits 3-1/2-month high as Brexit risk seen fading

By Jemima Kelly

LONDON, May 25 (Reuters) - Sterling climbed to a 3-1/2-month high against the euro on Wednesday, after a poll ahead of Britain's European Union membership referendum gave a six-point lead to the "In" camp, and as several bookmakers widened the odds on a Brexit.

The Survation telephone poll for online brokerage group IG showed 44 percent of respondents would vote to stay in the EU, compared with 38 percent who would seek to leave.

Two online opinion polls published on Tuesday, however, showed Britons were evenly split on how they intended to vote, contradicting signs in some other recent surveys that momentum was with the Remain camp.

So with less than a month to go before the referendum, bookmakers are offering something to investors that the polling industry has failed to provide: a clear trend, having consistently shown that a "Brexit" is unlikely to happen.

Most economists and strategists reckon a vote to leave the EU on June 23 would deal a blow to Britain's economy and would send sterling tumbling, while a vote to stay would drive sterling sharply higher.

"Sterling is surging ahead across the board on the remain camp gathering further support according to price makers. The polls are playing catch up and likely to shift in the same direction," said Mizuho's head of FX currency, Neil Jones.

"The FX market is ill-prepared for an in vote. We have become so fixated with all the ramifications as to economic direction under a Brexit scenario, we forgot to focus on whether this event will actually occur.

Sterling strengthened to 76.66 pence per euro after the Survation poll, its strongest since early February. Against the dollar, it climbed to as high as $1.4730, its highest since May 3.

Ratings agency S&P said on Wednesday that a Brexit could "jeopardize sterling's position as a reserve currency and the associated benefits to the 'AAA' credit rating".

Worries about a Brexit drove the pound down 11 percent on a trade-weighted basis between mid-November and early April, when it hit a 2-1/2-year low. But it has recovered around half of that as investors price out chances of a rate cut that some were factoring in if Britain opted to leave.

"After the pound's recent rebound, the market is now pricing in a more modest Brexit risk premium which is likely to result in a more modest initial bounce higher should the UK vote to remain within the EU," said Bank of Tokyo-Mitsubishi UFJ currency strategist Lee Hardman.

Bank of England Governor Mark Carney said on Tuesday that it was not clear whether the bank would cut interest rates if the economy slowed after a possible Brexit, but said leaving the EU would reduce the probability that the next move in rates would be up.

The cost of hedging against sterling weakness over the coming two months has fallen as worries about a Brexit have eased. Two-month sterling/dollar implied volatility has fallen to around 14 percent, having traded as high as 17.75 percent earlier this month. (Editing by Hugh Lawson)